Red October – is it the right time to buy?

By definition, a correction in financial markets is the result of a 10% decline or more from its most recent peak. The same definition is applied to any individual stock, a particular index, currency, asset class, or the broader market in general. Over the recent weeks, if one had to do a quick google search of how the term ‘market correction’ is trending, one would immediately notice a spike in interest over time. Nevertheless, this was nowhere near to the interest shown in the term last February, following the double-digit decline in the S&P 500 Index recorded over the shortest period since 1945 (– 13 days).

Corrections tend to occur numerous times, particularly in an economic environment where the US equity market has been rallying for almost a decade (boosted predominantly by the Tech companies), and in the midst of too many different factors going on at the same time – US-China trade war, US mid-term elections, Interest-rate hikes, earnings season, FAANGs internet giants, Brexit, inflationary concerns and a slowing global economy, amongst others.

However, the good news is that not all market corrections end up into a bear market, that is, a drop of more than 20% and which tend to coincide with a recession. In fact, according to data compiled by Schwab Centre for Financial Research it was reported  that out of the 22 market corrections on the S&P 500 since 1974, only four ended to become bear markets; 1980, 1987, 2000 and 2007.

Despite having registered significant single digit declines across the broader equity market, most of the drag was experienced across the US equity market, particularly the NASDAQ composite index – home to many US tech giants – which has not registered such significant declines since November 2008. This predominantly reflects mixed earnings and forward guidance reported by Facebook, Amazon, Netflix and Google. Following a rebound towards the end of the month, NASDAQ’s decline for October stood at 9.2%, followed by a fall of 6.9% in the S&P 500 and a 5.6% fall in the Euro Stoxx 600 indices.

At the other end of the spectrum, flight to quality pulled down the yield on the 10-year German Bund lower (higher prices), as the price of gold ticked higher too. Meanwhile, Italy’s budget spat led to further spread widening, whereas expectations for a robust jobs and wage growth readings resulted in a stronger dollar, as the 10-year treasury yield was nearing its recent peak of 3.25%, registered towards the beginning of October. The latter also reflects a more hawkish stance hinted by the US Federal Reserve, which had pushed up the yields at the beginning of the month close to eight-year highs.

Nevertheless, one should not be fooled by a substantially higher nominal yield when compared to practically all other yields on major government bonds. If one had to take into account the impact of higher interest rates in the US, coupled with abundant US Treasury issuances, all led to scarcer dollar notes and thus, implying an increase in hedging cost for overseas investors. From a European investor’s perspective, adverse movements in foreign exchange could also swiftly wipe out the additional yield benefit on such US denominated bonds.

On a more positive note, the broader recovery across the equity markets on the last trading day of the month lifted the FTSE All-World Index up by 1.3%, to narrow the overall monthly decline to 7.6%. Some investors took the opportunity to tap into the market once again at cheaper valuations, and as a result of the continued health of corporate profits reported in both Europe and Asia. This eased investors’ nervousness and worries on the impact of rising interest rates and a global economic slowdown.

To remain serene when markets turn this volatile is easier said than done. The truth of the matter however is that one should always keep focused on the bigger picture and what his or her investment objectives are. Obviously, there is no bull market without a bear market, and there will always come a time where one will be experiencing heightened volatility and downfall in the overall invested portfolio because of such an unavoidable fact of life. In this day and age, sudden swings across markets and asset classes has been even exacerbated as a result of increased computer-powered algorithmic investment strategies.

The million-dollar (or euro) question one would always want to have an answer to is whether we are anywhere near to a bear market scenario; or perhaps whether it is the right time to buy. Witnessing volatility within your portfolio, given the current macroeconomic and low yielding environment, is only natural. This does not necessarily mean that your portfolio is not properly structured. One should always take the opportunity to get back to the drawing board, reach out for advice, and properly assess whether you have the right exposure to the ideal asset classes that fit their long-term investment objectives and needs. For those investors which are perhaps more equity-oriented and have thus experienced more downside over the recent past, should recall one of Warren Buffett’s recommendations – “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

 

This article was prepared by Colin Vella, CFA, anInvestment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email colin.vella@jesmondmizzi.com; http://www.jesmondmizzi.com








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